Middle Market Deals and how to buy, sell and raise capital from $5 to $500 million

Some of you may be wondering (and the rest of you should be wondering) what the sub-prime mortgage market meltdown means to your business.

While it may be true that the economy can recover from this crisis in the credit markets, I would caution entrepreneurs to begin thinking about how to prepare for a combination credit crunch and recession.

First, the impact of a wide-spread tightening of mortgage credit will have an impact on the broader economy.  This will reduce home purchases and likely home values in many markets across the country, exacerbating an existing problem.  Next, increases in foreclosures will lead to stricter credit standards acrosss the board, further extending the problem.

The next phase of the cycle is likely to be tighter credit standards in other parts of the credit market, which will quickly lead to lower multiples of EBITDA being provided by banks on private equity leveraged buyout (LBO) transactions. 

As tighter credit leads to less liquidity in the middle market, valuation multiples will also decline.  Private equity firms will not tend to make up the difference because when they deploy more capital it impairs their returns.

While I don't want to cause any undue concern, I think that it would be wise to look at all of the options available to you (whether your are considering borrowing money or selling your business) and be prepared to take what you can get right now rather than waiting for the next opportunity, because it may not be as good as what you have right now.

What do you think?